Contract Management
The Air Force Should Improve How It Purchases AWACS Spare Parts Gao ID: GAO-05-169 February 15, 2005Over the past several years, the Air Force has negotiated and awarded more than $23 million in contracts to the Boeing Corporation for the purchase of certain spare parts for its Airborne Warning and Control System (AWACS) aircraft. Since they first became operational in March 1977, AWACS aircraft have provided U.S. and allied defense forces with the ability to detect, identify, and track airborne threats. In March 2003, GAO received allegations that the Air Force was overpaying Boeing for AWACS spare parts. This report provides the findings of GAO's review into these allegations. Specifically, GAO identified spare parts price increases and determined whether the Air Force obtained and evaluated sufficient information to ensure the prices were fair and reasonable. GAO also determined the extent to which competition was used to purchase the spare parts.
Since late 2001, the Air Force has spent about $1.4 million to purchase three ailerons (wing components that stabilize the aircraft during flight), $7.9 million for 24 cowlings (metal engine coverings), and about $5.9 million for 3 radomes (protective coverings for the radar antennae). The unit prices for the ailerons and cowlings increased by 442 percent and 354 percent, respectively, since they were last purchased in 1986. The unit price of the radomes, purchased under two contracts, nearly doubled from September 2001 to September 2003. Although some of the price increases can be attributed to inflation, other factors, such as re-establishing production processes and procuring limited quantities of the parts, contributed more significantly to the increases. In addition, the 2001 radome contract included about $8.1 million for Boeing to relocate equipment and establish a manufacturing capability at a new location. The Federal Acquisition Regulation (FAR) requires contracting officers to evaluate certain information when purchasing supplies and services to ensure fair and reasonable prices. However, Air Force contracting officers did not evaluate pricing information that would have provided a sound basis for negotiating fair and reasonable prices for the spare parts. Moreover, the Air Force did not adequately consider Defense Contract Audit Agency (DCAA) and DCMA analyses of these purchases, which would have allowed the Air Force to better assess the contractor's proposals. For example, when purchasing ailerons, the Air Force did not obtain sales information for the aileron or similar items to justify Boeing's proposed price and did not consider DCMA analyses that showed a much lower price was warranted. Instead, the contracting officer relied on a Boeing analysis. None of the spare parts contracts cited in the allegations were competitively awarded--despite a DCMA recommendation that the cowlings be competed to help establish fair and reasonable prices. The Air Force did not develop alternate sources for competing the purchase of the cowlings because it believed it lacked access to technical drawings and data that would allow it to compete the purchase. Yet the Air Force has a contract with Boeing that could allow the Air Force to order technical drawings and data specifically for the purpose of purchasing replenishment spare parts.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-05-169, Contract Management: The Air Force Should Improve How It Purchases AWACS Spare Parts
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Report to the Secretary of Defense:
United States Government Accountability Office:
GAO:
February 2005:
CONTRACT MANAGEMENT:
The Air Force Should Improve How It Purchases AWACS Spare Parts:
GAO-05-169:
GAO Highlights:
Highlights of GAO-05-169, a report to the Secretary of Defense
Why GAO Did This Study:
Over the past several years, the Air Force has negotiated and awarded
more than $23 million in contracts to the Boeing Corporation for the
purchase of certain spare parts for its Airborne Warning and Control
System (AWACS) aircraft. Since they first became operational in March
1977, AWACS aircraft have provided U.S. and allied defense forces with
the ability to detect, identify, and track airborne threats.
In March 2003, GAO received allegations that the Air Force was
overpaying Boeing for AWACS spare parts. This report provides the
findings of GAO‘s review into these allegations. Specifically, GAO
identified spare parts price increases and determined whether the Air
Force obtained and evaluated sufficient information to ensure the
prices were fair and reasonable. GAO also determined the extent to
which competition was used to purchase the spare parts.
What GAO Found:
Since late 2001, the Air Force has spent about $1.4 million to purchase
three ailerons (wing components that stabilize the aircraft during
flight), $7.9 million for 24 cowlings (metal engine coverings), and
about $5.9 million for 3 radomes (protective coverings for the radar
antennae). The unit prices for the ailerons and cowlings increased by
442 percent and 354 percent, respectively, since they were last
purchased in 1986. The unit price of the radomes, purchased under two
contracts, nearly doubled from September 2001 to September 2003.
Although some of the price increases can be attributed to inflation,
other factors, such as re-establishing production processes and
procuring limited quantities of the parts, contributed more
significantly to the increases. In addition, the 2001 radome contract
included about $8.1 million for Boeing to relocate equipment and
establish a manufacturing capability at a new location.
The Federal Acquisition Regulation (FAR) requires contracting officers
to evaluate certain information when purchasing supplies and services
to ensure fair and reasonable prices. However, Air Force contracting
officers did not evaluate pricing information that would have provided
a sound basis for negotiating fair and reasonable prices for the spare
parts. Moreover, the Air Force did not adequately consider Defense
Contract Audit Agency (DCAA) and DCMA analyses of these purchases,
which would have allowed the Air Force to better assess the
contractor‘s proposals. For example, when purchasing ailerons, the Air
Force did not obtain sales information for the aileron or similar items
to justify Boeing‘s proposed price and did not consider DCMA analyses
that showed a much lower price was warranted. Instead, the contracting
officer relied on a Boeing analysis.
None of the spare parts contracts cited in the allegations were
competitively awarded”despite a DCMA recommendation that the cowlings
be competed to help establish fair and reasonable prices. The Air Force
did not develop alternate sources for competing the purchase of the
cowlings because it believed it lacked access to technical drawings and
data that would allow it to compete the purchase. Yet the Air Force has
a contract with Boeing that could allow the Air Force to order
technical drawings and data specifically for the purpose of purchasing
replenishment spare parts.
E-3 Sentry AWACS Aircraft:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommends that the Secretary of Defense direct the Secretary of
the Air Force to take action to ensure that contracting officers obtain
and evaluate data needed to determine spare parts prices are fair and
reasonable, develop a strategy to promote competition to the maximum
extent possible in future spare parts purchases, and clarify the Air
Force‘s access to AWACS technical data and drawings. DOD concurred with
GAO‘s recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-05-169.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David E. Cooper at (202)
512-4125 or cooperd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Recent AWACS Parts Prices Are Significantly Higher Than Prior Purchase
Prices:
Air Force Did Not Obtain and Evaluate Information Needed to Negotiate
Fair and Reasonable Prices:
No Competition Used for AWACS Spare Parts Purchases:
Conclusions:
Recommendations for Executive Action:
Agency and Company Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: Comments from The Boeing Company:
Table:
Table 1: Summary of Contract Prices for Ailerons, Cowlings, and
Radomes:
Figures:
Figure 1: E-3 Sentry AWACS Aircraft:
Figure 2: Unit Price Increases for Ailerons, Cowlings, and Radomes:
Abbreviations:
AWACS: Airborne Warning and Control System:
DCAA: Defense Contract Audit Agency:
DCMA: Defense Contract Management Agency:
FAR: Federal Acquisition Regulation:
IFF: identification friend-or-foe:
United States Government Accountability Office:
Washington, DC 20548:
February 15, 2005:
The Honorable Donald H. Rumsfeld:
Secretary of Defense:
Washington, D.C.
Dear Secretary Rumsfeld:
For more than 25 years, the Air Force's Airborne Warning and Control
System (AWACS) aircraft have provided U.S. and allied defense forces
with the ability to detect, identify, and track enemy threats. The E-3
Sentry AWACS airplanes, with their large rotating radar domes, have
provided critical surveillance information for carrying out military
and peacekeeping operations. Over the past several years, the Air Force
has negotiated and awarded more than $23 million in contracts to the
Boeing Corporation for the purchase of certain spare parts to maintain
the Air Force's AWACS fleet.
In March 2003, we received allegations that the Air Force was
overpaying the Boeing Corporation for AWACS spare parts.[Footnote 1]
This report provides the findings of our review into these allegations.
Specifically, we (1) identified the price increases associated with the
ailerons, cowlings, and radomes; (2) determined whether the Air Force
obtained and evaluated sufficient information to ensure that the spare
parts prices were fair and reasonable;[Footnote 2] and (3) determined
the extent to which competition was used to purchase the parts.
To conduct our review, we examined contract files and met with Air
Force and Boeing representatives. We also reviewed analyses and
information provided to the Air Force by the Defense Contract
Management Agency (DCMA), the Defense Contract Audit Agency (DCAA), and
Boeing. We conducted our review from August 2003 to November 2004 in
accordance with generally accepted government auditing standards. A
more detailed discussion of our scope and methodology is in appendix I.
Results in Brief:
Since late 2001, the Air Force has purchased three ailerons for about
$1.4 million, 24 cowlings for about $7.9 million, and three radomes
(under two contracts) for about $5.9 million. The unit prices for the
ailerons and cowlings increased by 442 percent and 354 percent,
respectively, since they were last purchased in 1986. The unit price of
the radomes also increased significantly. The unit price of the radome
nearly doubled from a purchase in September 2001 to a purchase in
September 2003. Several factors, such as re-establishing production
processes and procuring limited quantities of the parts, contributed to
the price increases. Although a portion of the price increases could be
attributed to inflation, this portion was small. The Air Force paid an
additional $8.1 million in costs as part of the September 2001 radome
contract to move equipment and establish manufacturing capabilities in
a new location.
Although some price increases could be expected, contracting officers
did not take appropriate steps to ensure that the prices paid for the
ailerons, cowlings, and radomes were fair and reasonable. Specifically,
the Federal Acquisition Regulation (FAR) requires contracting officers
to obtain and evaluate information when purchasing supplies and
services to ensure that prices are fair and reasonable. We found that
Air Force contracting officers did not obtain and evaluate appropriate
pricing information that would have provided a sound basis for
negotiating fair and reasonable prices for the spare parts. Moreover,
the Air Force did not adequately consider DCAA and DCMA analyses of
these purchases, which would have allowed the Air Force to better
assess the contractor's proposals. For example, when purchasing
ailerons, the Air Force contracting officer did not obtain sales
information for the aileron or similar items to justify Boeing's
proposed price; this type of information would normally be obtained
because the ailerons were considered a commercial item. In addition,
the contracting officer did not act on DCMA analyses that showed a much
lower price was warranted. Instead, the contracting officer relied on a
Boeing judgmental analysis to support Boeing's proposed price. In
another case, the contracting officer for the purchase of the two
radomes did not consider the price of a recently acquired radome, nor
did the contracting officer obtain and evaluate information from Boeing
that supported the company's proposed price or obtain analysis from
DCMA.
None of the spare parts covered by the allegations were purchased
competitively. According to Air Force documents, Boeing was the sole
source for the spare parts. However, DCMA's analysis recommended that
the cowlings be competed because Boeing's proposed price was not fair
and reasonable and a subcontractor had provided the part under the
original production contracts. Despite the recommendation, the Air
Force did not attempt to develop alternate sources for competing the
purchase of the cowlings because it believed it lacked the required
information to do so. From the outset, Air Force documents stated that
the Air Force did not have access to drawings and technical data that
would allow it to compete the purchase. The Air Force and Boeing have
entered into a contract, which could allow the Air Force to order
drawings for the purpose of purchasing replenishment spare parts.
Boeing has not always delivered such data based on uncertainties
concerning the Air Force's rights to the data.
We are making recommendations to ensure appropriate information
and analyses are obtained and evaluated to help ensure that fair and
reasonable prices are negotiated in non-competitive procurements and
to promote competition to the maximum extent practicable in future
purchases of spare parts. DOD and The Boeing Company commented
on a draft of this report. In its comments, DOD agreed with GAO's
recommendations and identified actions it plans to take to implement
the recommendations. In its comments, The Boeing Company provided
information that augments the information in the report and provides
its perspective on the AWACS purchases.
Background:
The AWACS aircraft first became operational in March 1977, and as of
November 2004, the U.S. AWACS fleet was comprised of 33 aircraft. The
aircraft provides surveillance, command, control, and communications of
airborne aircraft to commanders of air defense forces. The onboard
radar, combined with a friend-or-foe identification subsystem, can
detect, identify, and track in all weather conditions enemy and
friendly aircraft at lower altitudes and present broad and detailed
battlefield information.
The AWACS airplane is a modified Boeing 707 commercial airframe with a
rotating radar dome (see fig. 1). The ailerons and cowlings are similar
to commercial 707 parts but were modified for special
requirements.[Footnote 3] The AWACS radome is the covering that
provides housing for the airplane's radar and friend-or-foe (IFF)
identification system. Half of the radome covers the radar and half
covers the IFF system and each has a different make-up in its
composition. The Air Force purchased only the IFF section of the radome
in the two separate purchases.
In the past, the Air Force has generally repaired, rather than
purchased, the ailerons, cowlings, and radomes but recently had to
purchase new parts to meet operational requirements. Prior to the
recent spare parts purchases, the ailerons and cowlings had not been
purchased since the mid-1980s, and the last radome unit had not been
purchased since 1998.
Figure 1: E-3 Sentry AWACS Aircraft:
[See PDF for image]
[End of figure]
All of the spare parts were purchased as noncompetitive negotiated
procurements. The Federal Acquisition Regulation (FAR) provides
guidance for the analysis of negotiated procurements with the ultimate
goal of establishing fair and reasonable prices for both the government
and contractor. For a noncompetitive purchase,[Footnote 4] the contract
price is negotiated between the contractor and government and price
reasonableness is established based primarily on cost data submitted by
the contractor. The ailerons were also purchased as a commercial item.
For a commercial item,[Footnote 5] price reasonableness is established
based on an analysis of prices and sales data for the same or similar
commercial items.
For the AWACS spare parts purchases we reviewed, DCMA provided
technical assistance to the Air Force by analyzing labor hours,
material and overhead costs, and contract prices.[Footnote 6] DCAA
provided auditing and cost accounting services. DCMA and DCAA analyses
were submitted to the Air Force prior to contract negotiations for the
respective purchases.
Recent AWACS Parts Prices Are Significantly Higher Than Prior Purchase
Prices:
Since late 2001, the Air Force has negotiated and awarded contracts to
Boeing for the purchase of outboard ailerons, cowlings, and radomes
totaling over $23 million. Specifically, the Air Force purchased three
ailerons for about $1.4 million, 12 right-hand cowlings and 12 left-
hand cowlings for about $7.9 million, and three radomes for about
$5.9 million. The Air Force paid an additional $8.1 million in costs as
part of the initial radome contract to move equipment and establish
manufacturing capabilities in a new location (see table 1).
Table 1: Summary of Contract Prices for Ailerons, Cowlings, and
Radomes:
Spare part: Ailerons;
Contract award[A]: April 2003;
Quantity: 3; Unit price: $464,133;
Other costs: 0;
Total contract price: $1,392,399.
Spare part: Cowlings[B];
Contract award[A]: Sept 2003;
Quantity: 24;
Unit price: $329,203;
Other costs: 0;
Total contract price: $7,900,881.
Spare part: Radomes[C];
Contract award[A]: Sept. 2001
Quantity: 1;
Unit price: $1,200,000;
Other costs: $8,100,546;
Total contract price: $9,300,546.
Spare part: Radomes[C];
Contract award[A]: Sept. 2003;
Quantity: 2
Unit price: $2,342,500;
Other costs: $0
Total contract price: $4,685,000.
Source: GAO analysis of Air Force data.
[A] The ailerons, cowlings, and September 2003 radome contracts were
firm-fixed-price contracts. The September 2001 radome contract was a
cost-plus-fixed-fee contract, which is a cost reimbursable contract
that provides for the payment to the contractor of a negotiated fee
fixed at the inception of the contract.
[B] The unit price represents the average unit price for the left hand
and right hand cowlings. The 12 right hand cowlings were purchased at a
unit price of $321,743 and 12 left hand cowlings were purchased at
$336,664.
[C] The unit price for the September 2001 radome represents the
contracting officer's estimated price for the radome.
[End of table]
The most recent per unit cost of each part represents a substantial
increase from prior purchases. The overall unit cost of the ailerons
and cowlings increased by 442 percent and 354 percent, respectively,
since they were last purchased in 1986. The unit price for the one
radome purchased under the September 2001 contract increased by
38 percent since it was last purchased in 1998, and the unit price
nearly doubled two years later under the September 2003 contract.
Overall, only a small portion of the price increases could be
attributed to inflation.[Footnote 7] Figure 2 shows the unit price
increases, including adjustments for inflation, for
ailerons, cowlings, and radomes.
Figure 2: Unit Price Increases for Ailerons, Cowlings, and Radomes:
[See PDF for image]
[End of figure]
The Air Force and Boeing cited a number of additional factors that may
have contributed to higher prices. For all the parts, the Air Force
purchased limited quantities, which generally results in higher unit
prices. For the ailerons, which had not been purchased since 1986,
Boeing officials told us that some of the price increase was
attributable to production inefficiencies that would result from
working with older technical drawings, developing prototype
manufacturing methods, and using different materials in the
manufacturing process. The unit price of the cowlings included costs
for the purchase of new tools required to manufacture the cowlings in-
house--which Boeing decided to do rather than have vendors manufacture
the cowlings, as had been done in the past. The new tools included
items such as large production jigs, used to shape and fabricate sheet
metal.[Footnote 8] Regarding radomes, the Air Force paid Boeing to
relocate tooling and equipment from Seattle, Washington, to Tulsa,
Oklahoma, and develop manufacturing capabilities at the Tulsa facility
to produce and repair radomes. Boeing had initially decided to
discontinue radome production and repair at its Seattle location due to
low demand for these parts but, after further consideration of the Air
Force's requirements, decided to relocate the capability in Tulsa. The
first radome contract the Air Force awarded Boeing included over
$8.1 million to relocate the tooling and equipment and set up the
manufacturing process. The remaining $1.2 million was the estimated
production cost of the one radome.[Footnote 9]
Air Force Did Not Obtain and Evaluate Information Needed to Negotiate
Fair and Reasonable Prices:
In negotiating contracts for the outboard ailerons, cowlings, and
radomes, the Air Force did not obtain and evaluate information needed
to knowledgeably assess Boeing's proposals and ensure that the spare
parts prices were fair and reasonable. In general, the Air Force did
not obtain sufficient pricing information for a part designated a
commercial item, adequately consider DCAA and DCMA analyses of aspects
of contractor proposals, or seek other pricing information that would
allow it to not only determine the fairness and reasonableness of the
prices but improve its position for negotiating the price.
Pricing Information Not Sought for Commercial Item to Ailerons:
Boeing asserted that the aileron assembly was a commercial item. Under
such circumstances, fair and reasonable prices should be established
through a price analysis, which compares the contractor's proposed
price with commercial sales prices for the same or similar items.
However, when purchasing the ailerons, the Air Force did not seek
commercial sales information to justify the proposed price. Instead,
the Air Force relied on a judgmental analysis prepared by Boeing, which
was not based on the commercial sales of the same or similar
aileron.[Footnote 10]
In reviewing the contractor's submissions of data to the government,
both DCMA and DCAA found Boeing's proposal inadequate for the Air Force
to negotiate a fair and reasonable price. DCMA performed a series of
analyses on the purchase of the aileron assembly, each of which
indicated that Boeing's proposed unit price was too high. Boeing
proposed in November 2002 to sell three aileron assemblies for $514,472
each. Subsequently, DCMA performed three separate price analyses, which
indicated that Boeing's price should be in the $200,000 to $233,000
range. However, the Air Force negotiation team did not discuss these
analyses with Boeing during negotiations or include them as part of the
Air Force's price negotiation documentation.[Footnote 11] In January
2003, DCAA reported that the proposed price was "unsupported" and that
Boeing did not comply with the Boeing Estimating System Manual, which
requires support for commercial item prices. Further, the report said
that Boeing must submit cost information and supporting documentation.
The Air Force never addressed DCAA's concerns. Instead, the Air Force
relied on the analysis prepared by Boeing and paid $464,133 per unit.
The price analyst involved with the negotiation said that, in
retrospect, the Air Force should have sought commercial sales
information from Boeing, citing this purchase as his first experience
with a commercial item. We asked Boeing to provide historical sales
information of the same or commercial equivalent item to use as a
general benchmark on price reasonableness of the ailerons purchased by
the Air Force. According to Boeing representatives, the requested data
were not available because the military version of the ailerons had not
been produced for over 20 years. Boeing representatives agreed that the
Boeing analysis was subjective, but they said the analysis represented
the best estimate based on their assumptions and limitations.
Air Force Did Not Act on DCMA's Recommendation to Investigate the Use
of Existing Tools for Cowlings:
When negotiating the purchase price for the cowlings, the Air Force
again did not use information provided by DCMA or address DCMA's
recommendation that it determine the availability and potential use of
existing tools to manufacture the cowlings. Included in the
$7.9 million contract for cowlings, Boeing proposed and the Air Force
awarded about $1.1 million for the purchase of new tools, such as large
production jigs, associated with the manufacture of the cowlings.
However, DCMA had recommended in its initial evaluation of Boeing's
proposal that the Air Force give qualified offerors an opportunity to
inspect the condition of cowling tools used in prior manufacturing for
their applicability and use in fabricating the cowlings. DCMA pointed
out that the tools were located at Davis-Monthan Air Force Base in
Arizona, where government-owned tooling is often stored when no longer
needed for production. However, the Air Force did not accurately
determine the existence and condition of the tools.[Footnote 12]
Subsequent to the contract award, Boeing--not the Air Force--determined
that extensive government-owned tooling was available at Davis-Monthan
and got approval, in May 2004, to use the tools in manufacturing the
cowlings. As a result, the cowlings contract included unnecessary tool
purchase costs when it was awarded. Air Force and Boeing officials
anticipated a contract modification would be submitted to reduce the
price as a result of using the existing tools.
Cost Information from Recent Radome Purchase Not Considered:
A significant portion of the September 2001 cost-plus-fixed fee
contract that the Air Force awarded to Boeing to purchase one radome
unit involved relocating tools and equipment and establishing a
manufacturing process at Tulsa. Specifically, over $8.1 million of the
contract, which was valued at about $9.3 million, was spent to move
equipment and establish a manufacturing process at the Tulsa facility;
the price of producing the one radome unit was about $1.2 million.
About 19 months later, in April 2003, at the Air Force's request,
Boeing provided a proposal to produce two additional radomes at the
Tulsa facility, and in September 2003, the Air Force awarded a contract
to Boeing to produce the two radomes at over $2.3 million per unit--
almost twice the 2001 unit price.
Based on our analysis, the Air Force did not obtain adequate data to
negotiate a fair and reasonable price for the second radome contract.
First, the Air Force requested a DCMA analysis of Boeing's proposal,
but, in late June 2003, DCMA told the Air Force price analyst that, for
an unexplained reason, DCMA did not receive the request for assistance;
the price analyst then determined that he would waive the technical
evaluation, which would forego the benefit of DCMA's technical
expertise. Second, and most importantly, the Air Force did not consider
Boeing's costs under the September 2001 contract, which would have
provided important information to help the Air Force determine if it
was obtaining a fair and reasonable price for the radomes.
No Competition Used for AWACS Spare Parts Purchases:
In addition to encouraging innovation, competition among contractors
can enable agencies to compare offers and thereby establish fair and
reasonable prices and maximize the use of available funds. The Air
Force determined that Boeing was the sole source for the parts and did
not seek competition. However, a DCMA analysis had determined that
Boeing's proposed price for the engine cowlings was not fair and
reasonable and, because a subcontractor provided the part in support of
the original production contracts, recommended that the cowlings be
competed among contractors.
From the outset of the cowlings purchase, Air Force documents said that
the Air Force did not have access to information needed to compete the
part. However, the Air Force has a contract with Boeing that could
allow the Air Force to order drawings and technical data for the AWACS
and other programs for the purpose of competitively purchasing
replenishment spare parts.[Footnote 13] Nevertheless, Boeing has not
always delivered AWACS data based on uncertainties over the Air Force's
rights to the data. Based on discussions with Air Force
representatives, Boeing has been reluctant to provide data and drawings
in the past, making it difficult for the Air Force to obtain them.
Moreover, Boeing maintains that it owns the rights to the technical
data and drawings and the Air Force could not use the drawings to
compete the buy without Boeing's approval.
It is unclear if the AWACS program office had placed a priority on
fostering competition for the cowlings and other spare parts.
Representatives of the AWACS spare parts program office at Tinker Air
Force Base cited a number of concerns in purchasing the spare parts
from vendors other than Boeing. First, they said that the need for
these spare parts had become urgent and noted that other vendors would
have to pass certain testing requirements, which could be a lengthy
process, and that, even with this testing, performance risks and
delivery delays were more likely to occur. An overriding concern was
that the Air Force establish a good relationship with reliable parts
providers, such as Boeing. Program office officials told us that the
Air Force would likely be better served in the long run by staying with
a reliable supplier rather than competing the parts.
In contrast, senior contracting officials at Tinker--who have oversight
responsibilities for the contracting activities that support the AWACS
program--have a different point of view. These officials were concerned
about the large price increases on AWACS spare parts and the lack of
competition. They stated that the Air Force is a "captured customer" of
Boeing because the company is the only source for many of the parts
needed to support aircraft manufactured by Boeing, such as the AWACS.
According to these senior contracting officials, during the last
several years Boeing has become more aggressive in seeking higher
profits regardless of the risk involved with the purchase. For example,
they told us that, even when the risk to the company is very low, the
company is seeking at least a 3-to 5-percent higher fee than in the
past. As a result, contracting officers have had to elevate some
negotiations to higher management levels within the Air Force. They
also said that, without the ability to compete spare parts purchases,
the Air Force is in a vulnerable position in pricing such contracts.
Earlier in 2004, Boeing and the senior Air Force contracting officials
involved with the aircraft programs managed at Tinker began a joint
initiative to work on various contracting issues. Concerning data
rights, these contracting officials told us that in future weapon
systems buys, the Air Force must ensure that it obtains data rights so
that it can protect the capability to later compete procurements of
spare parts.
Conclusions:
The Air Force needs to be more vigilant in its purchases of spare
parts. The AWACS parts purchases we reviewed illustrate the difficulty
of buying parts for aircraft that are no longer being produced as well
as buying them under non-competitive conditions. A key problem was that
the Air Force did not take appropriate steps to ensure that the prices
paid were fair and reasonable. It did not obtain and evaluate
information that either should have been available or was available to
improve its negotiating position. It did not attempt to develop other
sources to purchase the spare parts and promote competition. And, it
did not have a clear understanding of its rights to technical data and
drawings, which are necessary to carry out competitive procurements. As
the AWACS aircraft--like other Air Force weapon systems--continue to
age, additional spare parts will likely be needed to keep them
operational. Given the significant price increases for the
ailerons, cowlings, and radomes, the Air Force needs to look for
opportunities to strengthen its negotiating position and minimize price
increases. Clearly, competition is one way to do this. Unless the Air
Force obtains and evaluates pricing or cost information and/or
maximizes the use of competition, it will be at risk of paying more
than fair and reasonable prices for future purchases of spare parts.
Recommendations for Executive Action:
To improve purchasing of AWACS spare parts, we recommend that the
Secretary of Defense direct the Secretary of the Air Force to:
* ensure that contracting officers obtain and evaluate available
information, including analyses provided by DCAA and DCMA, and other
data needed to negotiate fair and reasonable prices;
* develop a strategy that promotes competition, where practicable, in
the purchase of AWACS spare parts; and:
* clarify the Air Force's access to AWACS drawings and technical data
including the Air Force's and Boeing's rights to the data.
Agency and Company Comments and Our Evaluation:
We received written comments on a draft of this report from DOD and
The Boeing Company.
In its comments, DOD concurred with GAO's recommendations and
identified actions it plans to take to implement the recommendations.
DOD's comments are included in appendix II. DOD also provided technical
comments, which we incorporated into the report as appropriate.
In its comments The Boeing Company provided information that augments
the information in the report and provides the company's perspective on
the AWACS purchases. With respect to the prices the Air Force paid for
the spare parts, Boeing provided more detailed information to explain
the costs associated with each part. However, the information Boeing
provided did not change our conclusion that the Air Force did not
obtain and evaluate sufficient information to establish fair and
reasonable prices. The company also noted that it has worked with Air
Force representatives to address issues associated with higher profits
and, as of January 2005, was working with the Air Force to address
issues associated with access to AWACS technical drawings and data. The
Boeing Company's comments are included in appendix III.
We are sending copies of this report to the Secretaries of the Air
Force, the Army, and the Navy; appropriate congressional committees;
and other interested parties. We will also provide copies to others on
request. In addition, the report will be available at no charge on the
GAO Web site at http://www.gao.gov.
If you or your staff has questions concerning this report, please
contact me at (202) 512-4841 or by e-mail at cooperd@gao.gov, or James
Fuquay at (937) 258-7963. Key contributors to this report were Ken
Graffam, Karen Sloan, Paul Williams, and Marie Ahearn.
Sincerely yours,
Signed by:
David E. Cooper:
Director:
Acquisition and Sourcing Management:
[End of section]
Appendix I: Scope and Methodology:
To identify price increases associated with the ailerons, cowlings, and
radomes, we reviewed Air Force contracting files and we held
discussions with members of the Air Force involved in each purchase,
which included contracting officers, negotiators, and price analysts.
These officials were located at Tinker Air Force Base, Oklahoma, the
location of the Airborne Warning and Control System (AWACS) spare parts
program office--the E3 Systems Support Management Office. To account
for the impact of inflation, we used published escalation factors for
aircraft parts and auxiliary equipment to escalate prices previously
paid for the parts to a price that would have been expected to be paid
if the prices considered the effects of inflation.
To determine whether the Air Force contracting officers obtained and
evaluated sufficient information to ensure that Boeing's prices were
fair and reasonable, we held discussions with the Defense Contract
Management Agency (DCMA) representatives and obtained copies of reports
and analyses prepared by DCMA and Defense Contract Audit Agency (DCAA).
We reviewed Air Force contracting files and held discussions with Air
Force officials that negotiated the respective purchases, which
included contracting officers, negotiators, and price analysts. We also
held discussions with representatives of Boeing and visited Boeing
production facilities in Tulsa, Oklahoma. The Boeing officials
represented several Boeing divisions involved in the purchases
including Boeing's military division (Boeing Aircraft and Missiles,
Large Aircraft Spares and Repairs), which had responsibility for
negotiating all of the spare parts purchases. Boeing Aerospace
Operations, Midwest City, Oklahoma, had contract management
responsibility for the purchases.
To determine the extent that competition was used to purchase the
parts, we reviewed Air Force contracting files and held discussions
with members of the Air Force involved in each purchase, which included
contracting officers, negotiators, and price analysts. We also held
discussions with representatives of the AWACS spare parts program
office and senior contracting officials responsible for overseeing
contracting activities at Tinker Air Force Base, Oklahoma.
We conducted our review from August 2003 to November 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Defense:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
3000 DEFENSE PENTAGON:
WASHINGTON, DC 20301-3000:
JAN 25 2005
Mr. David E. Cooper:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.:
Washington, D.C. 20548:
Dear Mr. Cooper:
Enclosed is the Department of Defense (DoD) response to the GAO draft
report, "CONTRACT MANAGEMENT: The Air Force Can Improve How It
Purchases AWACS Spare Parts," dated December 21, 2004 (GAO Code 120325/
GAO-05-169).
My point of contact for this report is Mr. Michael Canales, (703) 695-
8571 or via e-mail, michael.canales@osd.mil. We appreciate the
opportunity to review and comment on your findings.
Sincerely,
Signed for:
Diedre A. Lee:
Director, Defense Procurement and Acquisition Policy:
Enclosures: As stated:
Draft Report Dated December 21, 2004:
GAO CODE 120325/GAO-05-169 "CONTRACT MANAGEMENT: The Air Force Can
Improve How It Purchases AWACS Spare Parts"
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Air Force to ensure that contracting officers obtain and
evaluate available information, including analyses provided by DCAA and
DCMA, and other data needed to negotiate prices. (p. 13/GAO Draft
Report):
DOD RESPONSE: Concur. Pursuant to FAR 15.406, it is incumbent upon the
Contracting Officer and all members of the Air Force Negotiating Team
to obtain, evaluate, and analyze available information as appropriate.
This includes but is not limited to reports prepared by DCAA and DCMA.
OUSD(AT&L)DPAP will issue a memorandum to the Air Force highlighting
this requirement.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct the Air Force to develop a strategy that promotes competition,
where practicable, in the purchase of AWACS spare parts. (p. 13/GAO
Draft Report):
DOD RESPONSE: Concur. Pursuant to FAR Part 6, competition is the
preferred method of acquisition and should be used whenever possible.
Exceptions to competition should be well documented and well supported.
Consistent with current regulations, OUSD(AT&L)DPAP will ask the Air
Force to develop a strategy that promotes competition, where
practicable, in the purchase of AWACS spare parts.
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
direct the Air Force to clarify the Air Force's access to AWACS
drawings and technical data including the Air Force's and Boeing's
rights to the data. (p.13/GAO Draft Report):
DOD RESPONSE: Concur. There is an ongoing disagreement between the Air
Force and Boeing as to who has the actual data rights to many of the
spare parts for the AWACS program. OUSD(AT&L)DPAP will request the Air
Force clarify their access to AWACS drawings and technical data,
including the Air Force's and Boeing's rights to data.
Enclosure 1:
[End of section]
Appendix III: Comments from The Boeing Company:
27 January 2005:
Mr. David E. Cooper Director:
Acquisition and Sourcing Management:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Cooper,
On behalf of The Boeing Company I wish to acknowledge receipt of your
draft GAO audit BOEING entitled "The Air Force Can Improve How it
Purchases AWACS Spare Parts" forwarded by your letter dated 21 December
2004. 1 wish to assure you at the outset that Boeing takes such audits
quite seriously and that it has received the attention of Boeing senior
management. In your letter forwarding the draft audit you solicited
Boeing's written or oral comments for inclusion in the final audit
report. This letter provides such comments, and it is our intention to
correct, clarify, or provide Boeing's perspective regarding certain
aspects of the audit report.
Since the receipt of your request, we have gathered pertinent
information to address several key points raised in the audit,
conducted various meetings, and developed our assessment relative to
the draft's findings, conclusions and recommendations. Subsequent to
receipt of the draft audit Boeing representatives discussed and
clarified with you and other government representatives our findings.
Boeing greatly appreciates that opportunity and believes it to be
mutually beneficial.
The following are Boeing's comments regarding our assessment of the
information included in the draft audit you forwarded.
1) The audit states that the Air Force Contracting Officer did not
obtain sales information for the Aileron or similar items to justify
Boeing's proposed price. Our records indicate that the Contracting
Officer did in fact solicit such information, but since the Aileron is
not normally procured as a "Spare", but rather is a "Repairable item"
Boeing advised the Contracting Officer (CO) that such history and
pricing was not available. The solicitation also was issued as a FAR
Part 15 action. However, Boeing submitted its proposal as a commercial
item under the provisions of FAR Part 12 - since its application was to
a military derivative of a Boeing 707 commercial airframe and the item
was only available from our BCA Operating Group on a commercial FFP
basis. Accordingly, Boeing performed and provided a price analysis to
support the price reasonableness of this commercial item which the
draft audit referred to as a "judgmental analysis". This price
reasonableness analysis included comparison of this item to
commercially available similar items and considered other factors
associated with out of production aircraft assemblies.
2) The audit also states (on page 9) that DCAA reported that the
Aileron
Assembly proposed price was unsupported and that Boeing did not comply
with the Boeing Estimating System Manual (BESM) procedures. While it is
accurate that Boeing did not provide adequate price analysis support
for the Aileron pricing with our initial proposal, we did however
provide supplemental data providing such support within approximately
45 days of proposal submittal and in time to support fact finding and
negotiation of the proposal. This is supported by the audit finding
that the CO utilized this data as the basis of justifying his price
analysis and negotiation position. In this case the procurement of a
non-traditional item as a "Spare" posed unique challenges for our team
and made submittal concurrent with the proposal difficult.
Additionally, at the time of this proposal submittal in December 2002,
the BESM did not require a Price Reasonableness Determination (PRD) be
provided with the initial proposal submittal. This requirement was
added in January 2004. Boeing believes it met its obligation to submit
supporting data to assist the government CO in determining price
reasonableness.
During subsequent discussions with GAO the government clarified that
its critique in this area was primarily focused on the government
Contracting Officer's actions, and felt the CO should have obtained
additional price comparative data from other sources in addition to the
analysis provided by Boeing.
3) On page 12 and later in GAO's audit "Recommendations for Executive
Action" the audit report makes several statements regarding AWACS
drawings and technical data (ie: Intellectual Property). First, it
states that the government has a right to order such data and that
Boeing in the past has been reluctant or unwilling to provide the
government such data. Secondly, that the government should utilize this
data to actively foster competition for all future procurement of AWACS
spare parts. Since the early 1970's Boeing has maintained the Rights
Guard Contract (F34601-02-D-0082 and its predecessors) with the Air
Force as a means of coordinating the provisioning of technical data and
drawings for support of Military Derivatives of Boeing 707 and other
specified aircraft. Under this contract for "Other Aircraft Parts and
Auxiliary Equipment Manufacturing", the Air Force may request such data
be provided. However, the contract clearly states, under Section H,
entitled Limited Rights Technical Data subparagraph (a) (2), "If
contractor, in its sole discretion, determines in response to a request
from the Government that it cannot or will not consent to the
Government's use of limited rights technical data, it shall so notify
the Government in writing. Contractor shall have no obligation under
Clause B-1(a) of this contract to deliver copies to the Government of
any such limited rights technical data for which consent of use is not
granted." Hence the GAO draft report's assertion that all AWACS related
data is accessible to procurement agencies via the Rights Guard
contract is not supported by the contract. This contractual
discretionary prerogative recognizes that the design and development of
the aircraft and corresponding data was done at private expense (and is
therefore Proprietary) and that the Air Force in most cases did not
historically procure these data rights, thereby avoiding such
acquisition costs. It further recognizes that Boeing will assess such
requests on a case by case basis to determine the potential adverse
impact for future domestic and international business. It should also
be recognized that the current Rights Guard contract has been extended
through 31 March 2005, but is anticipated to terminate at that time.
For several months Boeing representatives have been working jointly
with OC/ALC and DLA Senior Acquisition representatives to develop a new
approach involving developing Licensing Agreements with the Air Force
and with our Supplier network. This proactive effort seeks to enhance
the government's ability to control and protect technical data while
developing more sources to participate in U.S. Government competitive
procurements, as recommended by the audit. The end result of these
initiatives may be lower overall program costs, and it is Boeing's
intention to increase the participation by small and small
disadvantaged businesses.
4) It is Boeing's position that the pricing table at the top of page 6
of the audit does not accurately reflect the Unit Pricing of the items
listed, although the total contract prices are accurate. In addition,
we feel that the price history analysis in the audit is misleading, as
it does not consider significant points contributing to the price
variances addressed. However we provide the following insight and
clarification relative to the unit prices shown.
a. Ailerons - The total Firm Fixed Price negotiated of $1,392,399
included Non-Recurring costs of $207,106.02 which is included in the
average Unit Price shown of $464,133, resulting in an overstated
Recurring Unit Price vs. the correct Recurring Unit Price of
$395,097.66 for comparison purposes. Further, the audit states the
Ailerons and Cowlings had not been purchased since 1986. Boeing notes
that since the late 1980's, the A/C and components went from an active
production line to an out of production situation. This necessitated
changing production locations (moving from Puget Sound, Washington to
our commercial production facility in Salt Lake City, Utah), incurring
start-up and loss of leaming inefficiencies, different applicable
overhead bid plans, and perhaps changing production methods. To reduce
the overall cost of our products by managing our overhead costs Boeing
has shut down production lines and other manufacturing activities/
facilities in the Puget Sound, Washington area that did not have
sufficient demand/ordering history. The comparative Recurring Unit
Price range of between $200 - $233K assessed by DCMA cited on page 9 of
the audit was subsequently partially provided to Boeing representatives
during the conduct of the audit. Based on the data that was shared,
Boeing was able to confirm with our Boeing Commercial Aircraft (BCA)
Group that that pricing was associated with the cost of a refurbished
used Aileron vs. a new production spare, and is therefore not valid for
a direct comparison. In subsequent discussions between the parties, GAO
representatives indicated that DCMA also had other pricing data that
they utilized to develop their pricing range assessment. Boeing does
not have adequate insight into this other data, and therefore can not
comment on its reasonableness. However, we can state that the
aforementioned range is significantly lower than the price that Boeing
can provide these items under these circumstances. Due to our inter-
component commercial BCA production source, these items are only
available to our IDS military operating group on a commercial FFP basis
(without supporting detailed cost element breakdowns), and therefore
must be procured from Boeing utilizing FAR Part 12 commercial item
price analysis procedures. Further, while the audit reflects the
government's estimated "should cost" value range, Boeing is not aware
of this item actually being procured by the government from an
alternate source at this price range resulting in delivery of
acceptable air-worthy parts under comparable circumstances.
b. Cowlings - The total contract price of $7,900,881 is accurate, but
it includes $2,642,540.90 of Non-Recurring effort associated with
Tooling and other start-up costs as detailed in our proposal of record.
The proposed Recurring Unit Price of the Cowlings is $219,086.58
(average right & left hand) vs. the $329,203 unit value reflected in
the audit table. Boeing consolidationlcost reduction actions precluded
this from being produced at our Puget Sound, Washington facilities.
However, in order to continue support of our product and our Air Force
customer, Boeing agreed to produce the part at our Tulsa, Oklahoma
facility. Our proposal assumed that Boeing would be required to provide
new tooling as none was identified at that time as available for use by
the Air Force. Subsequent to award of this Fixed Price contract, Boeing
identified that a significant amount of the required tooling was
available in storage in an as is condition at Davis Monthan AFB. Boeing
coordinated with the OCIALC CO to obtain contractual authorization to
refurbish and use that tooling, which the CO granted. The parties
subsequently executed a contract modification 009701 on 06 May 2004
where Boeing agreed to voluntarily negotiate an equitable price
reduction adjustment recognising the delta between the tooling price
included at award vs. an estimate of actual tooling refurbishment and
maintenance related costs with profit when such costs can be reasonably
assessed. Upon completion of this effort Boeing will propose an
equitable adjustment in accordance with that contract modification. It
should also be noted that this requirement was proposed and negotiated
on a sole source basis in accordance with FAR Par 15 procedures and
Boeing provided fully auditable detailed supporting estimates at the
cost element level in support of the proposed price. Therefore, the
primary basis of government evaluation should be cost analysis not
price analysis.
c. Radomes - Boeing concurs with the total prices of the 2001 and 2003
procurements reflected in the audit page 6 table. Relative to the 2001
procurement, Boeing's proposal did not break out the Non-Recurring
($7,057,351) and a unit Recurring value of $2,243,195 (subsequently
estimated by Boeing - see below), vs. the $1,200,000 value reflected in
the audit table. This variance in the 2001 Recurring unit price was
subsequently discussed with GAO representatives after Boeing receipt of
the draft audit. In those clarifying discussions Boeing stated that it
was unaware of and could not validate what the audit findings reflected
as the Radome Recurring unit value the audit indicates was documented
in the CO records, as it was not discretely priced/identified in our
proposal, during negotiations, or within the awarded 2001 contract. The
Boeing negotiator recalls that it was agreed, during negotiations, not
to breakout the Non-Recurring vs. Recurring value, but to establish a
cumulative Estimated Cost since this was a CPFF contract for a single
unit. Boeing does not agree that the audit breakout attributed to the
Air Force CO accurately represents the unit Recurring items value.
Subsequent to receiving the draft audit and noting this apparent
disparity in the first Radome Recurring unit price, Boeing tasked our
estimators to develop the Recurring first unit price only utilizing the
cost and pricing information included in our 2001 proposal of record
and supporting data from our contract files. Our assessment supports a
Recurring unit value of $2,243,195. We have the source documents to
support how these values were developed in our contracting files and
can provide them upon request. The 2003 Radome total negotiated Firm
Fixed Price of $4,685,000 is accurate and includes $236,543.86 Non-
Recurring at price level, and a Recurring unit value for 2 items of
$2,224,228.07. The second and third Radome Recurring unit values were
in fact priced less than the single 2001 Recurring unit price (as
Boeing has estimated it) and were based on actual labor manhours from
the first unit, and included a higher profit rate, since it was a FFP
vs. CPFF award. Boeing believes that the utilization of such actuals
from the first unit to develop the pricing for units 2 and 3 on the
2003 contract further supports the Boeing estimate of the Recurring
value of the 2001 Radome order. This item too has been out of
production since the late 1980's and was moved from Puget Sound to
Tulsa to be produced at these limited quantities. On page 11 paragraph
2, the audit states that "the Air Force did not receive cost or pricing
data from Boeing to support Being's proposed price." Our review
confirms that Boeing did provide a fully supported proposal with cost
element price breakdowns included and this requirement was processed in
accordance with FAR Part 15 procedures. Again, cost analysis not price
analysis should be the primary evaluation method. Further. the cost
information from the first Radome CPFF was fully available to the
Contracting Officer and referenced in our labor estimates used to
develop our unit 2 and 3 proposal.
d. Regarding the audit comments on page 12 of the draft report citing
Boeing becoming more aggressive in seeking higher profits, Boeing
believes the comments made by some senior contracting officials at
Tinker were unrelated to these AWACS spares orders. However, Boeing has
in the past raised issues regarding appropriate profit recognition in
other non-spares contracting activities. These requests by Boeing for
additional profit consideration stem from what we believed to be
inequitable and inappropriate government contracting positions.
Specifically, allowing no earnings on significant material cost content
in various Contractor Logistic Support (CLS) contracts without other
consideration, and placing engineering services efforts containing
significant material content under Time and Material (T&M) contracts.
Government contracting practices do not allow for profit on material
procured under T&M contracts, which when used for efforts requiring
significant material procurement, results in unreasonable total
contract earnings. Boeing believes it was justified in raising the
issues of utilization of appropriate contract types and fair profit
consideration of all elements of cost. It should also be understood
that Boeing and OC/ALC senior representatives met in 2003 and early
2004 and addressed these issues which were resolved by reviewing the
material contents of requirements before placing orders under the T&M
contract and incorporating new "performance based" earnings incentive
provisions into new CLS contracts. GAO indicated the time frame of the
government's remarks was March 2004. Boeing believes that significant
changes/improvements regarding this issue have been jointly achieved
since that time.
In summary, it is Boeing's assessment that the current draft audit
report appears to contain some information that this Boeing response
augments, clarifies and puts in an appropriate context. We believe that
GAO's and the other government representatives' intent is to fairly and
openly present a correct and accurate analysis, and include this Boeing
response in its final report to ensure a balanced assessment. Such
actions are greatly appreciated. During joint discussions after receipt
of the draft audit, it was clarified that while GAO believes that
although it may be in the government's interest to pursue competition
in acquiring these type of items, and that doing so might result in a
lower price to the government. GAO is not indicating that Boeing
unfairly or inappropriately priced these items to the government.
Rather, they are suggesting that had the government chosen to compete
the acquisition of these items, they may have procured them at a lesser
price from another source. In our response Boeing has addressed the
complexities of out of production spares fabrication as well as the
limitations associated with Intellectual Property data rights. Boeing
is committed to continue our present joint efforts with government
representatives to develop a mutually acceptable future approach to
facilitate government acquisition of these types of items in a cost
effective manner.
I am available, along with other Boeing representatives, for further
discussion at your convenience at 314-777-0354, by Email at
john.t.biciocchi@boeing.com, and by FAX at 314-777-0439.
Sincerely Yours,
The Boeing Company:
Signed by:
John T. Biciocchi:
Head of Contracts & Pricing:
Aerospace Support:
Integrated Defence Systems:
[End of section]
FOOTNOTES
[1] GAO received allegations regarding the Air Force's purchases
of cowlings (metal engine coverings) and outboard ailerons (wing
assembly components that stabilize the aircraft during flight). We also
reviewed the Air Force's purchases of radomes (coverings that protect
radar antennae) because, during our review, we became aware of a
similar allegation concerning overpricing of a radome.
[2] The pricing policy in the Federal Acquisition Regulation (FAR)
provides that the contracting officers must purchase supplies and
services from responsible sources at fair and reasonable prices [FAR
Subpart 15.4].
[3] The cowlings were modified to accommodate AWACS' engines, which
have a special gearbox that drives two electrical generators instead of
one--the standard configuration for the 707. The AWACS' ailerons have
differences in the paint as well as hardness requirements for certain
fasteners.
[4] FAR Subpart 15.4 provides policies and procedures for negotiating
noncompetitive procurements. Under a negotiated procurement, the
contractor submits a proposal to the government with its proposed costs
and profit as well as cost or pricing data that support its proposed
price. The government and contractor negotiate costs and profit (to
determine the overall price) based on the contractor's full disclosure
of data supporting the proposed price.
[5] FAR Part 12 relates to the procurement of commercial items and
refers to FAR Subpart 15.4, which provides contracting officers with
guidance for performing a price analysis to compare the contractor's
price with its commercial prices for the same or similar items, also
referred to as a commercial item equivalent. If the contracting officer
cannot determine whether an offered price is fair and reasonable, then
the contracting officer must require the contractor to submit other
information to support further analysis.
[6] During the negotiations, the Air Force was represented by
negotiation teams, which generally included a contracting officer,
negotiator, and price analyst.
[7] A portion of the price increases can be attributed to inflation--
the effects of which would be greatest for the ailerons and cowlings,
last purchased in 1986. Based on published escalation factors for the
aircraft equipment industry, the 1986 prices for the ailerons
and cowlings could have increased by about 46 percent by 2003, yet the
unit cost of the ailerons and cowlings increased by 442 percent and
354 percent, respectively. Based on escalation factors, the 1998 price
for the radomes could have increased by about 4 percent; yet, the unit
cost for the radome under the September 2001 contract increased by
38 percent. The escalation from 2001 to 2003, when the next radome
contract was awarded, was only 1 percent, but the unit price nearly
doubled.
[8] After the contract was awarded, the purchase of new tooling was not
necessary because Boeing located tooling used in the initial production
of the cowlings. See the discussion of this issue on page 10.
[9] The contract included only one line item that covered costs for
(1) producing the radome and (2) relocating equipment and establishing
a manufacturing capability. Therefore, the contract did not include a
separate estimate of the production cost of the radome. The$1.2 million
estimate was included in documentation provided by the Air Force
contracting officer who negotiated the contract.
[10] Normally the Air Force would conduct its own price analysis.
However, in January 2003, Boeing prepared an analysis for the Air
Force. Boeing's price analysis showed "significantly higher" prices
than those included in Boeing's final proposal. In our view, Boeing's
analysis was not reasonably supported. For example, the price of the
item purchased in 1986 ($85,602) was (1) escalated using escalation
factors to arrive at a 2003 value ($196,200), (2) adjusted for a
quantity of three aileron assemblies, and (3) adjusted again for
production inefficiencies. For these inefficiencies, Boeing used a
factor of 3.5 to account for having to work with older drawings,
planning prototype manufacturing methods, dealing with material
differences, and adjusting for other non-production conditions. Boeing
was not able to provide a sound basis for the 3.5 adjustment factor.
[11] FAR 15.405 concerning price negotiation provides that when
significant auditor or other specialist recommendations are not
adopted, the contracting officer should provide rationale that supports
the negotiation result in the price negotiation documentation.
[12] Air Force price negotiation documents said that the Air Force had
reviewed the availability of government-owned equipment. The documents
said that the tools had deteriorated and were no longer serviceable,
and the cost of refurbishment was considered comparable to current
proposed estimates for new tools. However, the information in the
negotiation documents was inaccurate.
[13] Contract No. F34601-02-D-0082, Rights Guard for Other Aircraft
Parts and Auxiliary Equipment Manufacturing, dated July 1, 2002.
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